From the West Coast Healthcare Desk
There will be no statewide ban on the "friendly physician model" directly coming out of the Envision Healthcare Corp. (Envision) lawsuit in California. In this lawsuit, American Academy of Emergency Medicine Physician Group Inc. (AAEM-PG) made factual allegations of inappropriate control by a lay person – Envision – of clinical matters, in violation of established restrictions on the corporate practice of medicine (CPOM) in the State of California. Meanwhile, Assembly Bill (AB) 3129 continues to move closer to a vote in the California legislature – which, if enacted, could impact the way in which private equity firms and hedge funds invest in healthcare in the state, as discussed in Holland & Knight's 2024 Midyear Review and previous alert, "New Bill Would Empower California AG to Curtail Healthcare Private Equity Transactions." For now, management service organizations and their owners can breathe easier knowing that the worst-case scenario proposed by AAEM-PG in its lawsuit against Envision will not come to fruition.
We previously outlined and discussed the allegations at issue in American Academy of Emergency Medicine Physician Group, Inc. v. Envision Healthcare Corporation, et. al., Case No.: 3:22-cv-00421-CRB. (See Holland & Knight's previous alert, "Federal Bankruptcy Court Stays Envision Healthcare Litigation in California," Aug. 3, 2023.) In short, AAEM-PG alleged that the management agreement at issue gave Envision (a lay person/entity) the right to affect clinical decisions by granting it the authority to 1) determine which and how many physicians the provider group could hire, 2) determine the terms and amount of compensation paid to the group's physicians, 3) determine work schedules and other employment terms, including with respect to patient encounters, working conditions and restrictive covenants, 4) determine the nature of any physician employment-related advertising and 5) negotiate provider contracts with third-party payers. During this tumultuous litigation, and before the parties agreed to settle, Envision faced a Chapter 11 restructuring and extensive discovery battles.
In recent news, on July 23, 2024, AAEM-PG filed a stipulation of voluntary dismissal of its lawsuit against Envision. The next day, AAEM-PG issued a press release stating that the lawsuit had ended with Envision's departure from the State and that, in light of this departure, the court may no longer have jurisdiction over the matter. By that time, Envision had ceased operations in California and entered into a confidential settlement with AAEM-PG. However, Envision still denies AAEM-PG's allegations and maintains that it operates within a business model commonly used across the healthcare industry and with high ethical standards that prioritize the health and safety of patients.1 The press release also suggests that there may be lasting impacts of the case, but that remains to be seen. There was no final judgment on the merits of the case. This resolution of the litigation actually demonstrates that the friendly physician model remains a viable option in California so long as the parties adhere to established corporate practice of medicine laws and board of medicine guidance.
Conclusion
Does this settlement tell us anything new? Not much. Just as we've identified in previous alerts, this case serves as another reminder of the importance of adopting a culture of compliance and that parties can challenge management arrangements if they are perceived to interfere with clinical decision-making and professional judgment. The California Medical Board's guidance draws a clear line that continues to be enforced. Friendly physician arrangements must be carefully structured to ensure clinical decision-making, particularly for the hiring and firing of professional staff, remains with the friendly physician. Those interested in establishing or operating an MSO arrangement with a "friendly PC" should consult sophisticated, experienced legal counsel to help ensure the terms of the arrangement – and the parties' adherence to those terms – comply with California law.
Footnote
1 Becker's Hospital Review, July 26, 2024.
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